Spending your Money – Financial Literacy 102

You’ve landed a great job, and you’ve gotten your first paycheck, now what? There are a number of ways to spend and use your hard earned cash, but some are more costly than others!

Bank Accounts and Writing Checks

If you haven’t already, now is the time to setup basic banking account. You’ll need atleast a checking and a savings account at the bank or credit union of your choice. Not all accounts are created equally! Pay special attention to minimum balances, fees, and possible interest on your savings. Local credit unions tend to have higher interest (in this case, a percentage you get for letting the bank hold your money) and better rates on car and house loans for members. Bigger banks tend to have more amenities, like online banking, mobile app support, or free transfers to other users at the same bank. Take your time to make the right decision for yourself.

Once you’ve got your checking account, you’ll get a booklet of checks. If you’ve never had to complete a check before, it can be a little intimidating, but a check is just a simple form instructing your bank who and how much to pay from your account:

Contact information – Your name and address

Date – The date you are completing the check (you can put a future date, and the recipient cannot cash the check until that date)

Pay to the Order of – Write the company name or full name of the individual receiving the money

Numeric amount – Write the amount the check is worth in numbers

Written amount – Write out the amount in words, including a fraction for any cents (amount/100s)

Your bank’s name and address

Memo line – optional, describe what the check is for, used for your records or the records of recipient

Signature line – the check is not valid until you sign it

Check number – checks are numbered in order in your booklet, help to keep track of which checks have been used

Checking Account number – your account number with your bank

Routing number – required for your check to work, also necessary information to have if you’re setting up direct deposits or bill pays to/from your checking account.

How Interest Works

Those of you now repaying your student loans should be familiar with interest, but it’s integral to understanding how interest works (both in your favor and against you) in order to understand debt, spending and borrowing money. Interest is a fee, usually a percentage of the amount borrowed, that the borrower pays the lender. Your bank pays you interest on your savings and retirement accounts, because the bank is basically borrowing that money from you – your money is not just sitting in a vault somewhere, the bank is using it as part of their liquid assets with the understanding you can get your money back whenever you need it. The same is true when you borrow money from the bank – you pay the bank interest on the money you are borrowing.

Student, car, house or credit cards all have different interest rates depending on the market and your personal risk level. As a first time car buyer, you might get an outrageous interest rate like 14% because no one knows if you’re a reliable borrower – your personal credit score helps companies determine your borrowing risk. It’s possible with a great credit score and history to find low and 0% interest loans. Credit cards and personal loans tend to have higher interest rates – more on that later.

Early in your loan, it will behoove you to pay as much as you can towards your principal, or amount owed. Paying more on the front end means you’ll pay less over the lifetime of the loan – if you owe less, the interest is less. If you let compound interest grow out of control, it can quickly get out of hand – existing interest is added to your principal, increasing the amount every month! No matter how or for what you borrow money, be mindful of the interest rates, and prioritize paying off debt with higher rates.

Credit Cards

Now that you’ve got your bank accounts in order and a regular paycheck, you’ll notice a lot of credit card offers finding their way to your home. This is no coincidence! Banks make a ton of money off of credit card debt, and know that young people suddenly flush with a full-time paycheck and more likely to fall for some of the credit card traps. While there are benefits to opening a line of credit, there are a number of pitfalls to watch out for:

Not all cards are created equal

Be wary, and weigh every credit card and offer carefully. Look at the interest, debt limits, rewards and fees. Cards connected with your bank can setup auto-draft from your checking, and may have additional rewards for members. Take your time and make an educated decision.

The debt limit is not an extra bank account

Cards will have a debt limit, or the amount of money you can borrow at a given time – there are often fees if you go past this limit. Just because your card has a $5,000 debt limit doesn’t mean you have $5,000 extra dollars to spend every month. It’s not free money, or the banks money – it’s your money and you have to pay back everything you borrow.

Avoid carrying credit card debt month to month

Interest on credit cards is no joke, and we talked about above. While it may be necessary to carry some debt for a couple of months, like a large unexpected or necessary expense, your primary goal should always be to pay off your credit card bill every month BEFORE there is time for interest to accrue.

Minimum Payments won’t get you very far

All cards come with a minimum payment, or the minimum amount you owe on your bill every month. They are designed to pay off your monthly interest but make little headway into your actual borrowed amount. Minimum payments extend the life of the debt, meaning the bank makes more money off of you.

Consumer Debt versus Collateralized Debt

Everyone has heard the old adage “spending money you don’t have on things you don’t need”, but that is exactly how credit cards lead to consumer debt. Say you find a great entertainment system, evening ensemble, or some other consumer good that’s too expensive. If you fall for some of the pitfalls mentioned above, it can be very difficult to work your way out. The only way you can get out of consumer debt is to pay off the money you owe, and the amount you owe can quickly spiral out of control – you are on the hook for every cent you borrow, and the bank is going to get their money one way or another.

Collateralized debt is generally considered safer and more likely to give you a return on your investment. For one, collateralized debt (mortgages, cars) means there is something the bank can take away if you do not pay your loan – they will come for their house or their car if you stop paying them, and then that’s the end of that. Collateralized debt is also considered a benefit for your ability to make and save money. Buying a house, having reliable transportation, or paying for school enhance your financial stability and worth. So, before taking on any kind of debt, consider if the item your purchasing will enhance your financial future, or satisfy a temporary want.

About the Author

Esme received her M.A. In Counseling from St. Edward's University, and worked with students at Concordia University Texas' Career Center. She developed a passion for Career Counseling after leaving undergrad without much guidance, and grappling with unsatisfying work. She strives to help others bridge the gap between graduation and "the real world."